4/16 5/16 6/16 7/16 8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17 (SMGR IJ) 1Q17 review: Hard time persists Basic Industry Company Report May 2, 2017 (Maintain) Hold Target Price (12M, IDR) 8,000 Share Price (4/28/17, IDR) 8,825 Expected Return -9.3% Consensus OP (17F, IDRtr) 5.3 EPS Growth (17F, %) -31.2 P/E (17F, x) 16.8 Industry P/E (17F, x) 17.3 Benchmark P/E (17F, x) 16.2 Market Cap (IDRbn) 52,345.7 Shares Outstanding (mn) 5,931.5 Free Float (mn) 2,906.1 Institutional Ownership (%) 70.8 Beta (Adjusted, 24M) 1.4 52-Week Low (IDR) 8,050 52-Week High (IDR) 11,875 (%) 1M 6M 12M Absolute 0.6-11.5-12.2 Relative -2.0-16.6-29.5 (D-1yr=100) JCI SMGR 125 115 105 95 85 75 (SMGR) posted its 1Q17 financial results after the market closed last Friday (4/28). The results indicated that the cement industry was still facing a hard time. Although SMGR s sales volume could have grown positively, a fall in average selling price (ASP) dragged revenue down. However, SMGR successfully posted positive 6.3% YoY revenue growth in 1Q17, supported by other business segments, especially the ready mix concrete (RMC), which revenue doubled from last year. Unfortunately, the production cost (COGS) significantly surged, which we attribute to rising coal prices. For the bottom line, SMGR booked a very weak 1Q17 net profit of IDR746.5bn (-27.8% YoY; -53.1 QoQ). We revise our cost estimate due to lower-than-expected margins in 1Q17 and maintain our Hold recommendation on SMGR with a lower target price of IDR8,000 (previous TP: IDR8,780). 1Q17 result: Another pressure from higher production cost SMGR s revenue came in at IDR6.4tr (+6.3% YoY; -9.3% QoQ), broadly in line with our and consensus FY17 estimates (22.8% and 23.2%, respectively). Amidst the gloomy outlook for cement, SMGR maximized its revenue from its other business segments, especially the ready mix concrete (RMC). Its RMC business segment s revenue contribution jumped from only 1.7% in 3M16 to 5.2% in 3M17, with fantastic revenue growth of 223.1% YoY. However, SMGR s main business, cement, still booked deteriorated revenue (-1.2% YoY). SMGR booked 6.1mn tonnes in domestic cement sales during 3M17, translating to 3.1% YoY volume growth (see Figure 1 and 2). Its 1Q17 volume sales growth was mainly underpinned by (Semen Gresik; 11.2% YoY), as compared to Semen Padang (-8.4% YoY) and Semen Tonasa (-2.8% YoY). Thang Long Cement Joint Stock Company (TLCC), SMGR s subsidiary in Vietnam, booked better 1Q17 volume sales growth (+20.0% YoY) than domestic s. TLCC s volume sales brought SMGR s total 1Q17 volume sales to 7.0mn tonnes (+7.8% YoY). However, despite the positive total volume sales growth during 1Q17, its domestic ASP did not show any sign of recovery (see Figure 3). SMGR s cost of goods sold (COGS) surged 23.9% YoY to IDR4.5tr in 1Q17, mainly driven by higher manufacturing overhead cost (+27.6% YoY). Two big components in SMGR s production cost, fuel and electricity, saw a jump this quarter (as compared to the same quarter last year). We ascribe this to coal prices, which have been increasing since around 3Q16. It was trading at c.usd80-90/mt during 1Q17 (vs. c.usd50/mt during 1Q16; see Figure 4). As a result, SMGR s COGS/tonne increased 13.6% YoY to IDR623,240/tonne. Higher COGS resulted in gross profit s contracting 19.9% YoY to only IDR1.9tr in 1Q17 (vs. IDR2.4tr in 1Q16). Gross profit margin fell 990bps from 40.3% in 1Q16 to only 30.4% in 1Q17. SMGR s efficiency strategy by pushing down operating expenses (-12.1% YoY) could not save its operating profit. Operating profit only came in at IDR896bn (-27.4% YoY; -18.6% QoQ), translating to 14.0% operating profit margin, lower than 1Q16 (20.5%) and 4Q16 (15.6%). For the bottom line, SMGR booked IDR746.5bn in net profit (-27.8% YoY; -53.1 QoQ), accounting for 18.9% and 19.2% of our and consensus FY17 estimates, respectively. PT. Mirae Asset Sekuritas Indonesia Cement Mimi Halimin +62-21-515-1140 (ext.233) mimi.halimin@miraeasset.co.id FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F Revenue (IDRbn) 26,987 26,948 26,134 28,092 30,340 Gross profit (IDRbn) 11,579 10,646 9,856 8,989 10,012 Operating profit (IDRbn) 6,947 5,899 4,973 4,214 4,854 NP (IDRbn) 5,560 4,521 4,522 3,111 3,594 EPS (IDR) 937 762 762 524 606 BPS (IDR) 4,054 4,454 4,895 5,115 5,511 P/E (x) 9.4 11.6 11.6 16.8 14.6 P/B (x) 2.2 2.0 1.8 1.7 1.6 ROE (%) 23.1% 17.1% 15.6% 10.3% 11.0% ROA (%) 16.2% 11.9% 10.2% 6.8% 7.3% Source: Company data, estimates
Cut our FY17 net profit target but maintain Hold with lower TP Given SMGR s sluggish performance in 1Q17, we cut our FY17 net profit estimate due to the weak 1Q17 ASP (see Table 3). We also revise our cost estimate due to lower-than-expected margins in 1Q17. We maintain our Hold recommendation on SMGR and revise down our target price from IDR8,780 to IDR8,000. Our concerns on SMGR are as follows: a) sluggish cement business segment performance in 1Q17 (although the prospect of SMGR s other business segments, such as the RMC, are quite encouraging) and b) continuing slow demand environment amidst oversupply, which can negatively impact ASP and margins. Risks to our call are: 1) stronger-than-expected property market recovery, 2) cement industry consolidation, and 3) government intervention supportive to the property and cement industries. 2
Figure 1. SMGR s domestic cement sales volume Figure 2. SMGR s cumulative domestic cement sales volume (mn tonnes) 2017 2016 (mn tonnes) 3.0 2.5 2.0 2.1 March 17: +5.8% YoY; +8.3% MoM 1.9 2.1 6.2 6.1 6.1 +3.1% 6.1 1.5 6.0 1.0 6.0 5.9 0.5 5.9 0.0 5.9 5.8 3M16 3M17 Source: Company data, ASI, Source: Company data, ASI, Figure 3. SMGR s domestic ASP (excluding TLCC) Figure 4. Coal price trend 2017 2016 2015 2014 (USD/MT) 2017 2016 (IDR/ton) 120 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Mar 2017: -9.7% YoY Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 110 100 90 80 70 price difference gap 60 50 40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Company data, Source: Bloomberg, Table 1. SMGR s 1Q17 financial performance FY (Dec.) 1Q16 4Q16 1Q17 YoY QoQ Revenue (IDRbn) 6,021 7,052 6,399 6.3% -9.3% COGS (IDRbn) -3,596-4,769-4,456 23.9% -6.6% Gross profit (IDRbn) 2,425 2,282 1,943-19.9% -14.9% Gross profit margin (%) 40.3% 32.4% 30.4% Operating profit (IDRbn) - SG&A 1,234 1,101 896-27.4% -18.6% NP (IDRbn) 1,034 1,593 747-27.8% -53.1% NP margin (%) 17.2% 22.6% 11.7% Source: Company data, estimates Table 2. SMGR s 1Q17 run-rate FY17 (F) FY17 (F) 1Q17 (A) Actual vs. FY17F (%) FY (Dec.) Mirae Consensus Actual Mirae Consensus Revenue (IDRbn) 28,092 27,589 6,399 22.8% 23.2% Pretax profit (IDRbn) 5,153 5,154 876 17.0% 17.0% NP (IDRbn) 3,955 3,890 747 18.9% 19.2% Source: Company data, Bloomberg, estimates 3
Figure 5. SMGR s historical 1Q revenue and its growth Figure 6. SMGR s revenue breakdown REVENUE YoY growth (IDRbn) (YoY, %) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Source: Company data, Source: Company data, Table 3. Earnings forecast revisions FY (Dec.) 12/17 (Old) 12/17 (New) 12/18 (Old) 12/18 (New) Revenue (IDRbn) 28,092 28,092 30,340 30,340 Gross profit (IDRbn) 10,563 8,989 11,408 10,012 Operating profit (IDRbn) 5,309 4,214 5,704 4,854 NP (IDRbn) 3,955 3,111 4,249 3,594 Source: Company data, estimates 4
(SMGR IJ/Hold/TP: IDR8,000) Income Statement (Summarized) Statement of Financial Condition (Summarized) (IDRbn) 12/15 12/16 12/17F 12/18F (IDRbn) 12/15 12/16 12/17F 12/18F Revenue 26,948 26,134 28,092 30,340 Cash 3,989 2,848 2,008 1,194 Cost of Goods Sold 16,302 16,278 19,103 20,328 Trade Receivables 3,544 3,838 3,083 3,330 Gross Profit 10,646 9,856 8,989 10,012 Inventories 2,409 2,671 3,059 3,255 Operating Expenses -4,747-4,882-4,776-5,158 Other CA 596 1,016 900 972 Operating Profit 5,899 4,973 4,214 4,854 PPE 25,168 30,847 33,869 37,651 other income/(loss) -95-142 -240-260 Other Non-CA 2,447 3,007 2,551 2,755 Pretax Profit 5,851 5,085 4,058 4,686 Total Assets 38,153 44,227 45,470 49,157 Income Tax 1,325 550 933 1,078 Trade Payables 3,783 4,078 3,549 3,777 Non-Controlling Interest 4 13 13 13 ST debt 846 1,811 1,887 2,066 Net Profit 4,521 4,522 3,111 3,594 Total current liabilities 6,599 8,152 7,519 8,049 LT debt 3,156 4,450 5,077 5,804 Profitability ratio Total Liabilities 10,712 13,653 13,594 14,931 Gross Profit Margin 39.5% 37.7% 32.0% 33.0% Common Stock 593 593 593 593 Operating Profit Margin 21.9% 19.0% 15.0% 16.0% Paid in Capital 1,458 1,458 1,458 1,458 Net Profit Margin 16.8% 17.3% 11.1% 11.8% Retained Earnings 23,815 26,528 27,830 30,180 Return on Equity 17.1% 15.6% 10.3% 11.0% Non-Controlling Interest 1,021 1,539 1,539 1,539 Return on Asset 11.9% 10.2% 6.8% 7.3% Equity (ex minority) 26,420 29,035 30,337 32,688 Cash Flow (Summarized) (IDRbn) 12/15 12/16 12/17F 12/18F Operating Cash Flow Net income 4,521 4,522 3,111 3,594 Depreciation and amortization 1,366 2,111 1,978 2,218 in trade receivables 243 294-755 247 in inventories -403 262 388 196 in others CA 0 419-115 72 in trade payable 752 295-529 228 in accrued expense 188 44 12 12 in others CL 140 249-193 111 Net cash operating activities 7,374 7,209 4,938 5,827 Investing Cash Flow in PPE 6,312 7,790 5,000 6,000 Net cash investing activities -6,297-8,350-4,544-6,204 Financing Cash Flow in other liability 218 93-53 80 in equity 2,148 1,906 1,809 1,244 Net cash financing activities -2,027 0-1,234-438 Net cash -950-1,141-840 -814 beginning balance 4,940 3,989 2,848 2,008 ending balance 3,989 2,848 2,008 1,194 Source: Company, estimates 5
APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, PT Mirae Asset Sekuritas Indonesia, and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -10% * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. ( Mirae Asset Daewoo ) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein. Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. 6
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